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BCE Remains Evenly Poised

Last year, Canada’s largest telephone operator BCE Inc. (BCE) reached all its financial targets including revenue, EBITDA, earnings per share, and free cash flow on the back of higher wireless revenue, improving wireline revenues, growing contribution from its media business and cost reduction methods.

The same trend continues this year as well. Healthy wireless and increasing traction for the newly acquired media businesses boosted the company’s first quarter earnings that outpaced the Zacks Consensus Estimate and the year-ago earnings.

BCE, which operates through its 100% subsidiary Bell Canada, projects revenue and EBITDA growth of 3–5% and 2–4%, respectively, this year. The company focuses on six strategies including investing in broadband network and services, accelerating wireless services, leveraging wireline momentum, expanding media leadership, improving customer service and achieving a competitive cost structure.

The company is enhancing its wireline and wireless video capabilities with significant new investments in broadband networks that are expected to generate higher revenue per user (:ARPU) and attract new customers. Besides, the operational cost savings will help in offsetting the margin erosion arising out of the FibeTV development and high-margin legacy voice and data revenues.

Additionally, acquisitions play a major role in driving the company’s earnings per share and free cash flow, thereby boosting shareholders’ return. Over the last three years, BCE raised its annual dividends seven times, representing an increase of 49% since the fourth quarter of 2008.

However, BCE operates in an environment crowded with new wireless carriers and faces cutthroat competition from other national carriers Telus Corporation (TU) and Rogers Communications Inc. (RCI). The wireline business also remains challenged by competition from cable companies and other alternative service providers.

The company’s revenue continues to face pressure from operations that are lagging in the Internet protocol TV (IPTV) rollout. BCE is experiencing a declining ARPU – the lowest among the three national carriers – largely due to a fall in voice usage and roaming, as a result of softness in the Canadian economy.

Further, continued investments in broadband network expansion on both the wireline and wireless fronts could restrict the company’s profitability going forward in the form of higher depreciation expenses.

We are maintaining our long-term Neutral recommendation on the stock. For the short term (1-3 months), BCE retains a Zacks #3 (Hold) Rank.